Profits tipped to fall short of recovery

Australian companies are expected to ditch the 'cautious optimism' of last year in their interim profits, though without a full recovery.

Transcript

WHITNEY FITZSIMMONS, PRESENTER: The financial crisis will still be a dominant theme in the profit reporting season which kicks off this week. While analysts say earnings and dividends should have stabilised after big falls last year, a full recovery in profits is not expected until 2011. Desley Coleman reports.

DESLEY COLEMAN, REPORTER: It's nearly 12 months since the All Ordinaries hit its financial-crisis lows, and while the last reporting season produced the biggest drop in company profits since the 1990 recession, the stock market has clawed back more than 50 per cent of its value.

RICHARD SCHELLBACH, EQUITY STRATEGIST, CITI: 2010 will be very different from 2009, but it's very much also a return to what we would consider a more normal environment. 2009 was very much a year where you were making bets on whether or not the global financial system and economies would survive.

DAVID CASSIDY, EQUITY STRATEGIST, UBS: It's still going to be a fairly soft year for the FY10 year; we expect only about 2 per cent earnings growth for the market. Indeed, the first six months to December 31 will still be negative, but a much better performance in the second half leading on to quite strong growth in FY11.

ELIO D'AMATO, CEO, LINCOLN INDICATORS: Well we expect this reporting season pretty much to be a very simple one. To be honest, it's Australian operations: good. Overseas operations: challenging. And we can't wait for 2011.

ELIO D'AMATO: What we saw in 2009 was a movement away from the old debt practices of the past where debt was basically used to fuel any form of growth. Those high risk strategies are at least going to be shelved for the next few years as companies return to basic core fundamentals with regards to funding their operations.

DESLEY COLEMAN: And many analysts expect the Australian share market to drift sideways this year.

DAVID CASSIDY: There's still an issue that the economy's still not firing on all cylinders. I think areas like some of the mining services companies, I think the rebound is coming, but we're not there yet. I think if you're exposed to the global economy, particularly the developed world, Europe and the US, there's still going to be a story of fairly soft conditions.

DESLEY COLEMAN: Last year many companies announced profit downgrades and cut dividends. Richard Schellbach, Equity Strategist with Citi, warns that 55 per cent of companies will report falls in earnings per share for the first half.

RICHARD SCHELLBACH: A lot of the bad news will probably be viewed as a symptom from 2009 and then could somewhat be ignored. We think there will be a lot of attention in the outlook statements coming from management teams, and particularly we see potential for earnings upgrade for the outer years, the FY2 years in terms of 2011. We see that is where the potential where earnings could be somewhat upgraded.

DESLEY COLEMAN: The first to be hit by the global credit crisis were the banks and financial stocks. But the Commonwealth Bank's surprise increase to its profit forecast last month has the sector poised to lead the charge in a fresh round of earnings upgrades.

RICHARD SCHELLBACH: We note that earnings in Australia are now about 32 per cent off their peak level from February 2008. And usually after a significant period of earnings downgrades, as we've had in the most recent global earnings recession, analysts often - consensus analysts - often get somewhat left behind by the returning strength in economies and corporate earnings. So we would see this potentially as the dawn of a multi-year earnings upgrade cycle.

DAVID CASSIDY: We're overweight mining, we're overweight banking and we're overweight media. They'd be our three strongest sector calls. And I think in each case, it's a view that the earnings recovery is still being underestimated by the market. So we see good earnings surprise potential in each of those three sectors.

DESLEY COLEMAN: And while the mood is likely to remain cautious this reporting season, analysts expect that the market sell-off in January will provide investors with the opportunity to grab some bargains.